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The Limits of Market Organization The Limits of Market Organization The Limits of Market Organization RICHARD R. NELSON EDITOR Russell Sage Foundation ⏐ New York The Russell Sage Foundation The Russell Sage Foundation, one of the oldest of America’s general purpose foundations, was established in 1907 by Mrs. Margaret Olivia Sage for “the improvement of social and liv- ing conditions in the United States.” The Foundation seeks to fulfill this mandate by fostering the development and dissemination of knowledge about the country’s political, social, and economic problems. While the Foundation endeavors to assure the accuracy and objectivity of each book it publishes, the conclusions and interpretations in Russell Sage Foundation pub- lications are those of the authors and not of the Foundation, its Trustees, or its staff. Publica- tion by Russell Sage, therefore, does not imply Foundation endorsement. BOARD OF TRUSTEES Robert E. Denham, Chair Alan S. Blinder Larry V. Hedges Alan B. Krueger Christine K. Cassel Jennifer L. Hochschild Cora B. Marrett Thomas D. Cook Timothy A. Hultquist Eric Wanner Christopher Edley Jr. Kathleen Hall Jamieson Mary C. Waters John A. Ferejohn Melvin Konner Library of Congress Cataloging-in-Publication Data The limits of market organization / edited by Richard Nelson. p. cm. Includes bibliographical references and index. ISBN 0-87154-626-4 1. Comparative economics. 2. Mixed economy. 3. Government ownership. 4. Capitalism. 5. Free enterprise. 6. Economic policy. I. Nelson, Richard R. HB90.L535 2005 330.12′2—dc22 2004058806 Copyright © 2005 by Russell Sage Foundation. All rights reserved. Printed in the United States of America. No part of this publication may be reproduced, stored in a retrieval system, or transmitted in any form or by any means, electronic, mechanical, photocopying, recording, or otherwise, without the prior written permission of the publisher. Reproduction by the United States Government in whole or in part is permitted for any purpose. The paper used in this publication meets the minimum requirements of American National Standard for Information Sciences—Permanence of Paper for Printed Library Materials. ANSI Z39.48-1992. Text design by Suzanne Nichols. RUSSELL SAGE FOUNDATION 112 East 64th Street, New York, New York 10021 10987654321 Contents Contributors vii Chapter 1 Introduction 1 Richard R. Nelson PART I INFRASTRUCTURE, NATURAL MONOPOLY, 25 AND EQUITABLE ACCESS Chapter 2 Electric Power 27 Kira Fabrizio Chapter 3 Telecommunications Regulation: An Introduction 48 Nicholas Economides Chapter 4 Passenger Rail 77 Elliott D. Sclar Chapter 5 Financial Clearing Systems 114 John A. James and David F. Weiman PART II HUMAN SERVICES 157 Chapter 6 The Role of Markets in American K–12 Education 161 Richard J. Murnane Chapter 7 Early Childhood Education and Care 185 Sheila B. Kamerman and Jane Waldfogel Chapter 8 Market Versus State in Health Care and Health Insurance: False Dichotomy 213 Dahlia K. Remler, Lawrence D. Brown, and Sherry A. Glied PART III SCIENCE AND TECHNOLOGY 231 Chapter 9 Basic Scientific Research 233 Richard R. Nelson CONTENTS Chapter 10 The Internet 259 David C. Mowery and Timothy Simcoe Chapter 11 Satellite Data 294 Roberta Balstad PART IV PROTECTING THE PUBLIC AND THE STATE 319 Chapter 12 Public Health 321 Kristine M. Gebbie Chapter 13 Campaign Finance 335 Richard Briffault Chapter 14 Conclusion 371 Richard R. Nelson Index 377 vi Contributors RICHARD R. NELSON is George Blumenthal Professor of International and Public Affairs, Business, and Law, Emeritus, at Columbia University. ROBERTA BALSTAD is director of Columbia University’s Center for Interna- tional Earth Science Information Network (CIESIN). RICHARD BRIFFAULT is vice-dean and Joseph P. Chamberlain Professor of Legislation at Columbia Law School. LAWRENCE D. BROWN is professor in the Department of Health Policy and Management in the Mailman School of Public Health at Columbia University. NICHOLAS ECONOMIDES is professor of economics at Stern School of Busi- ness at New York University. KIRA FABRIZIO is a doctoral candidate at the Haas School of Business at the University of California, Berkeley, and is currently a visiting scholar at the Boston University School of Management. KRISTINE M. GEBBIE is Elizabeth Standish Gill Associate Professor and Director of the Center for Health Policy at the Columbia University School of Nursing. SHERRY A. GLIED is professor and chair of the Department of Health Policy and Management in the Mailman School of Public Health at Columbia University. JOHN A. JAMES is professor of economics at the University of Virginia. CONTRIBUTORS SHEILA B. KAMERMAN is Compton Foundation Centennial Professor for the Prevention of Children and Youth Problems at the Columbia University School of Social Work, director of the Columbia Institute on Child and Fam- ily Policy (ICFP), and codirector of the ICFP Clearinghouse on International Developments in Child and Family Policies. DAVID C. MOWERY is the William A. and Betty H. Hasler Professor of New Enterprise Development in the Haas School of Business at the University of California, Berkeley. RICHARD J. MURNANE is Thompson Professor of Education and Society at the Harvard University Graduate School of Education. DAHLIA K. REMLER is associate professor in the School of Public Affairs at Baruch College, City University of New York. ELLIOTT D. SCLAR is professor of urban planning and public affairs at Columbia University and holds appoints in the Graduate School of Architec- ture, Planning, and Preservation and the School of International Affairs. TIMOTHY SIMCOE is assistant professor of management in the Rotman School of Management at the University of Toronto. JANE WALDFOGEL is professor of social work and public affairs at Columbia University School of Social Work and research associate at the Centre for Analysis of Social Exclusion at the London School of Economics. DAVID F. WEIMAN is Alena Wels Hirschorn ’58 Professor and chair of the Department of Economics at Barnard College. viii 1 INTRODUCTION Richard R. Nelson HE CLOSE of the twentieth century saw a virtual canonization of mar- ket organization as the best, indeed the only effective, way to structure Tan economic system.1 This phenomenon, though strongest in the United States and, to a somewhat lesser extent, the United Kingdom, was widespread. The conception of market organization being canonized was simple and pure, along the lines of the standard textbook model in econom- ics. For-profit firms are the vehicles of production. They decide what to pro- duce and how, on the basis of their assessments about what is most profitable. Given what suppliers offer, free choice by customers, who decide on the basis of their own knowledge and preferences where they will spend their own money, determines how much of what is bought by whom. Competition among firms assures that production is efficient and tailored to what users want, and prices are kept in line with costs. The role of government is lim- ited to establishing and maintaining a body of law to set the rules for the mar- ket game and assuring the availability of basic infrastructure needed for the economy to operate. Economists of an empirical bent and political scientists and sociologists who have studied actual modern economies recognize the oversimplifications involved in this folk theory. If intended as a positive theory of how modern economies are actually structured, it misses the complexity of market organi- zation in many spheres of economic activity and ignores the wide range of ac- tivities involving major investments of resources where markets play a limited role. The theory represses the extensive roles of government in modern economies. More generally, it misses the institutional complexity and varie- gation of modern economies.2 The folk theory clearly is intended more as a normative statement than as a positive one. In this role, it has been highly successful in recent years. 1 THE LIMITS OF MARKET ORGANIZATION While the broad ideological argument is focused on the economy as a whole, it is at the sectoral or activity level that the details of economic organi- zation are worked out. At this level, discussion today about the way a sector or activity should be structured almost always starts with the presumption that market organization, of a relatively simple kind, is the right solution. This is the “default” solution. In recent years, sectors and activities that were previ- ously regulated have been subject to strong pressures for deregulation. Where there is a major public sector role, the pressures are toward privatization. Under this view, competition is always something to be fostered, and arguments for public support of any kind are viewed with suspicion. Propositions to the ef- fect that perhaps market organization is not appropriate for the activity in ques- tion tend to be rejected out of hand. There is a strong preference to use the market as much as possible and to keep nonmarket elements to a minimum. A case can be made that this apparent bias in favor of simple market or- ganization at a sectoral level is, on net, a plus. It points policy discussion right from the start toward a mode of organization that, in fact, has served effec- tively as a central part of the governing structure over a wide range of activi- ties and sectors. It is associated with bias against governing structures that rely heavily on central planning and top-down command and control, which often have proved problematic or worse in contexts in which they have been em- ployed. However, the case for markets can be pushed too far. If the presumption in favor of market organization is accompanied by blindness to the complex- ity and variegation of modern economies, an ideological resistance to mixed forms of governance, and hostility to structures that make little use of markets, this can be a real problem. Modern societies face a number of challenging and often contentious choices regarding how to organize and govern a variety of activities that together employ a large and growing share of their resources.
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